Lower food prices at Walmart (WMT) - Get Walmart Inc. Report , sharp price reductions at grocery stores such as Kroger (KR) - Get Kroger Co. (KR) Report and Aldi, and the rapid shift to digital shopping have rocked Target (TGT) - Get Target Corporation Report to its very core.
The discount retailer reported fourth-quarter adjusted earnings of $1.45 a share on Tuesday, badly missing Wall Street estimates of $1.51. Same-store sales declined 1.5%, also missing estimates for a 1.3% decline. For comparison, Walmart U.S. delivered a same-store sales gain of 1.8% during the fourth quarter, propelled by lower prices in food.
Target said it sees full-year earnings of $3.80 to $4.20 a share, markedly below analysts' forecasts of $5.34. Target Chief Financial Officer Cathy Smith told investors that February sales were "challenging and choppy."
"Efforts have not been enough to win in this challenging marketplace," Brian Cornell, chairman and CEO of Target, conceded to investors at a meeting on Tuesday. Cornell added the marketplace is placing "stress" on Target's financial model.
TheStreet is at Target's investor day Tuesday. Follow @BrianSozzi on Twitter for updates
Target also warned that it was transitioning to a new "financial model," one headlined by lower product prices and investments in remodeling stores and improving customer service.
"Our current margin rate will not allow us to go fast enough [on improving results]," Cornell added. Target said it will invest $1 billion this year in operating margins.
Target shares finished the session sharply lower by 12% to $58.77.
Improving the look of Target stores is an especial focus.
Target said it will remodel 100 stores this year and 250 next year. By 2019, Target expects that it will have completed 600 store refreshes.
Execs also promised to slash prices on personal care and food prices in order to boost store traffic.
Despite Target warning of a weak holiday season earlier in the year, the magnitude of the fourth-quarter earnings shortfall, lackluster guidance and comments from Cornell stunned Wall Street, which sent shares of Target down as much as 14% in early trading.
"I am surprised like everyone else," Deutsche Bank analyst Paul Trussell told TheStreet via email.